Central bank seeks to temper rate expectations

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‘Whatever monetary policy we do now will more likely be felt in 2019 and beyond, rather than in 2018. That’s why we don't necessarily react to Feb[ruary] 2018 [inflation]...' -- Central bank Governor Nestor A. Espenilla, Jr. -- Photo by Melissa Luz T. Lopez

By Melissa Luz T. Lopez
Senior Reporter

INFLATION’s continued pickup to a fresh three-year high in February will not necessarily push the central bank to raise policy interest rates later this month.

“The elevated February inflation figure is in line with our updated forecast for a temporarily higher inflation than target range in 2018 due to transitory factors,” BSP Governor Nestor A. Espenilla, Jr. said in a text message to reporters.

Prices of widely used goods rose by 3.9% in February using 2012 as the new base year, according to the Philippine Statistics Authority (PSA). The pace picked up from 3.4% in January and 3.1% in February 2017.

Using the older model pegged at 2006 prices, inflation surged to 4.5% from the previous month’s four percent to shoot beyond the 2-4% target set by the Bangko Sentral ng Pilipinas (BSP) for the full year.

The central bank chief said monetary authorities will “closely monitor” developments and factor in all relevant data in its upcoming monetary policy review, with their second meeting set on March 22.

“The operative word is temporary. How temporary is temporary is what needs careful analysis,” Mr. Espenilla said when pressed further, while noting a “long lag” between policy tightening and its impact on the financial system.

“Whatever monetary policy action we do now will more likely be felt in 2019 and beyond rather than 2018. That’s why we don’t necessarily react to Feb. 2018 but must look much further ahead and rely on forecasts,” Mr. Espenilla added.

The central bank chief said that latest projections showed monthly inflation peaking at roughly 4.8% later this year.

“We don’t see it exceeding five percent for 2018 and we expect it to decline and come back to target in 2019,” Mr. Espenilla said.

The central bank expects inflation to average 3.5% next year.

Mr. Espenilla added that the BSP will stick to the 2-4% target band for inflation despite PSA’s rebasing to attune to shifts in consumption preferences.

Global banks said the inflation uptrend will likely be sustained in the months ahead, which would need to be matched by higher benchmark rates from the central bank.

“We still expect CPI inflation to drift higher from 3.9% in February, likely breaching the four percent target, as the impact of TRAIN has yet to fully be felt,” Nomura research analysts Euben Paracuelles and Brian Tan said in a report, noting that prices could go higher on the back of impending power rate hikes.

Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion (TRAIN) law, cut personal income tax rates but reduced value added tax exemptions and added levies on cars, fuel, sugar-sweetened drinks, investment products and a host of other items when it took effect in January.

Nomura expects four rate hikes this year starting with this month’s meeting, which if realized will be the first tightening since September 2014. Rates are now at a 2.5-3.5% range.

Analysts at ANZ Research, however, said they are revisiting their call for a 25-basis-point rate increase given the BSP’s “reluctance to tighten” policy settings, based on Mr. Espenilla’s latest statements.

Mr. Espenilla maintained that analyst claims that the BSP is letting monetary policy run too loose is “unfounded,” asserting that the BSP can deploy other tools to influence market rates and support the economy.

Further reductions in bank reserves remain on the BSP’s plans, Mr. Espenilla said, as he emphasized that additional liquidity can be siphoned off through weekly term deposit auctions and even via interventions in the daily peso-dollar trading.

“Being a reform, it is something always on our mind but we can’t be oblivious to the environment,” the central bank chief told reporters on the sidelines of a meeting of the Management Association of the Philippines.

“There is a calibrated speed and a purposeful timing in carrying these reductions out.”

The BSP cut by one percentage point the reserve requirement of big banks to 19% of total deposits, which took effect last Friday.

He noted that flexible exchange rate movements are another source of stability. “Every time the BSP, for example, intervenes in the foreign exchange market by selling dollars in the market, we are basically taking away pesos from the market.”

Mr. Espenilla said current economic conditions remain conducive to growth, citing a manageable fiscal deficit, a sound and stable banking system, and ample dollar reserves.

“The Philippine economy enjoys a sustainable growth momentum. Over the medium term, the Philippine economy is expected to expand by above six percent annually in the next three years,” Mr. Espenilla said.